Title service speeds up multiproperty deals

Buyers explain how the right title insurance firm can save time, money and frayed nerves in the closing of large real estate transactions.

Leslie Ng, senior vice president of acquisitions in the New York office of Dallas-based Patriot American Hospitality, knows the importance of reliable title insurance. His firm is in negotiations to acquire the Wyndham hotel chain, including 23 owned or leased hotels, 79 management and franchise agreements and 11 full-service hotels.

"We want a policy that meets the needs of the acquisition at the most competitive rates possible," says Ng, "and we want it from a firm that can close the deal."

Closing the deal means finishing the work within the allotted timeframe so the completion of the transaction is not delayed. And knowing the title firm will get the job done instead of just hoping they will, can save the acquisition executive a lot of sleepless nights.

This certainty comes only with experience and a strong relationship with the title insurance firm; knowing the firm can and will provide the services necessary to do the job and meet the closing deadline.

"Every title insurance firm is offering the same thing as far as the title insurance product is concerned," explains Glenn Hawkins, senior title adviser with Commonwealth Land Title Insurance Co., Wayne, Pa. "So the only thing we have to sell is customer service."

"Price is often regulated by the state where the property is located, so service is sometimes the only competitive difference between title firms," adds Randy Axelson, vice president of operations and research with First Industrial Realty Trust, Chicago. "The competition is so intense they will jump through flaming hoops to keep your business."

Axelson says most of First Industrial's title insurance business goes to Ticor Title Insurance Co., a subsidiary of the Chicago Title Insurance Co. family. However, he says, they also do business with First American Title Insurance Co. and Commonwealth Land Title. In fact, he stresses the need to use several title insurance firms.

"You have a company that gets the lion's share of your business, but you always want to have limits on the amount of business you do with any one company," Axelson says. "You don't want to put all of your eggs in one basket."

This same philosophy applies to large individual transactions as well.

For example, Regal Hotels International is currently in negotiation to purchase U.N. Plaza Hotel from the city of New York for $102 million. "This was such a large dollar figure, we decided it was best to use several title insurance firms to spread out the risk," says Lyle Boll, vice president and general counsel for the Englewood, Colo.-based hotel chain, who points out that in the past title firms have had financial problems.

Boll says Richmond, Va.-based Lawyers Title is the lead title insurer in the U.N. Plaza deal, but three other title firms are also involved. Although this is only a single-property acquisition, the same idea could apply to big-dollar, multiproperty deals.

Relationships mean everything Joel Eastman, general counsel with Dallas-based Bristol Hotels & Resorts, which primarily uses Houston-based Stewart Title Guaranty Co., says: "Aside from financial stability, which really has to be a given at this level, our relationship with the title company is our main consideration. There are so many parties involved in large acquisitions you need to know the title aspect of the transaction is taken care of."

Eastman says that Stewart has put together an entire team in the Dallas office that handles Bristol's transactions. "It is really efficient," he says. "For each transaction, we don't have to bring them up to speed on our needs, and they don't have to bring us up to speed on their services."

But if problems do come up at closing, it can be very costly. For this reason many firms require that a representative of the title firm be present at each closing. "If any questions arise about what kind of policy they are getting, we can answer them," says Dean Youngberg, vice president, national sales and service with Old Republic National Title Insurance Co., Minneapolis.

"Even if no problems occur, just having a representative of the title firm on hand assures both parties that the bases are covered," adds Axelson.

"There are a lot of people involved in a real estate closing and, if the title work is not done on time, these people are just sitting around," says Robert S. Bozarth, vice president and major transactions council with Lawyers Title. "So good service can save the client a lot of money in fees."

"When the deeds transfer you start receiving the cashflow from the properties," explains Jon Raleigh, senior operations administrator, with First Industrial, which earlier this year completed a $139 million, 39-property acquisition from Syosett, N.Y.-based Lazarus Burman. "Any holdup can cost you money."

"The larger the deal the more important the turn-around time," says Axelson. "And with a transaction where a lot of properties are involved, you are talking about big dollars."

Eastman agrees that speed in the transaction is important, "Once you have identified a deal, done the due diligence and are sure it is the way to go, you want to complete it and get on with business."

The importance of the client/service provider relationship is not lost on either side of the business transaction. "It is very important in any service business," says Bozarth. "If you don't break your back for the client every time, they are going to know it and take their business elsewhere. So you can't afford to let up in the quality of service."

"We just want to make sure the title insurer commits the human resources needed to work through the title objections and to complete the closing statement," says Ng.

Choosing a title insurance firm that is familiar with the property type involved in the sale also can reduce the possibility of a delay.

Hotel deals pose a challenge For example, closing hotel transactions requires certain provisions not required for other property types, such as the proration of many working capital items.

"Hotel transactions are different from other property transactions in that to a greater extent you are acquiring an operating business," says Boll.

These items usually include inventory, night ledgers and vacation and sick pay for employees, among others. "Certain title companies understand hotel transactions better than others," Ng says.

"It can be more complicated in a hotel transaction, and it is definitely helpful if the title company has been through it before," says Eastman.

Familiarity with the properties in the sale, regardless of the property type, can also be an advantage in the eyes of some sellers.

"Often we will check who did the current title insurance on the property if it was sold previously," says Axelson. "The fact that the company already knows the properties could speed things along and save a day or two. But that alone would not preclude the use of a title firm we had a relationship with."

Another issue of concern to firms making large multiproperty acquisitions is the desire to have a title firm with a national presence to ensure they have the reach to handle title searches nationwide and beyond.

For example, recently, Bristol Hotels & Resorts completed a 60-property acquisition from Holiday Inn. "Those 60 properties were located in more than 20 states and Canada," says Eastman. "But Stewart Title was able to coordinate the title searches for all of the properties through their branch offices, but we had to deal only with Stewart's Dallas office."

"Title companies want to be a one-stop shop for their clients," says Hawkins. "Again, it is a matter of service."

"No company wants to have to call 50 different title firms to complete a large transaction," says Youngberg.

While service is obviously critical, today's emphasis on the bottom line doesn't allow management to stray too far from the cost issue. Although title insurance prices are regulated in some states, they are not in others and this allows for some price negotiation, particularly on multiproperty deals.

"One of the issues in a multiproperty deal is price," says Axelson. "And in states where price is not regulated, you can often drive a better deal with the title firm."

Hawkins says that title insurance is a business based on volume and that firms are willing to trim their margins to attract particular deals they feel will be profitable.

In the future, multiproperty transactions also could be an opportunity for title firms to use their ever-expanding menu of real estate services.

Lawyers Title is looking closely at offering environmental and title insurance as a package deal. "Both types of insurance are needed when real estate is purchased so it seems like a good fit," says Bozarth. But he points out that, as yet, environmental coverage has not taken on the importance of its title counterpart. "But I definitely feel that the business is moving in that direction." Appraisal, survey and escrow services are others that title firms may soon be providing for commercial real estate transactions.

Reporting on title insurance's rapid growth in 1996, Wayne, Pa.-based Corporate Development Services Inc.'s ninth annual CDS Performance of Title Insurance Companies states that the title insurance industry showed a net operating gain of $78.8 million vs. a loss of $33.3 million during the previous year -- a 136% turnaround.

Some of the other major findings provided by the report show that the title insurance industry wrote $762 million more in premiums than in 1995, and title losses incurred and other deductions fell by $13 million.

Lawrence E. Kirwin, editor of the report and president of the firm, says that last year's operating profits were up 40%, and average company profit margins grew from 12.5% to 16.2%, with the largest companies growing up to 19.7%. He adds that net income before taxes rose 45% for the industry as a whole and title insurance's consolidated net income advanced 32%. And the industry added $120.7 million to policyholder surplus vs. a $50.2 million reduction in surplus for 1995.

The report provides 43 individual financial ratios for each title insurance company and ranks them based on five "vital signs of financial health," says Kirwin. And this year's report includes six sections of analysis: balance sheets, income statements, cashflow statements, premiums written and losses paid, financial performance and state by state market share.

To obtain a copy of the report, call Lawrence Kirwin at 1-800-296-1540.